US soft landing hinges on Fed’s inflation tolerance FMTNews FMTBusiness
Federal Reserve Chair Jerome Powell and his peers appear poised to hike rates by a quarter point after pausing credit tightening last month.
The big question facing policymakers and financial markets is what comes next. Former Fed Chair Ben Bernanke said that this week’s rate increase may be the central bank’s last in a credit-tightening campaign that’s already seen rates rise by five percentage points.In the absence of a recession, the jobs market looks set to remain tight, with demand for workers continuing to outstrip supply. That will keep wages elevated, pressuring companies to raise prices to cover their added labour costs.
“There’s really no evidence that the Fed has done enough to stay on the sideline,” said Stifel Financial Corp chief economist Lindsey Piegza, who sees the central bank eventually raising rates to 6%, from a range of 5% to 5.25% now.Prominent economists who were early in warning the Fed about inflation now differ over how it should proceed.
The inflation rate has come down significantly from its highs last year. To a large extent, that reflects an unwinding of price pressures arising out of the Covid-19 pandemic and Russia’s invasion of Ukraine, perhaps most prominently in the oil market. “Going down the last mile is hard,” said former Fed official Vincent Reinhart, now chief economist at Dreyfus and Mellon. “As recession becomes more likely, the Fed will give up its pursuit of price stability.”
El-Erian, who is a Bloomberg Opinion columnist, said the Fed is likely to face a choice in the fourth quarter: Press ahead with efforts to reduce inflation to target and risk breaking something in the financial markets or the economy, or recognise that getting to 2% won’t be easy and be prepared to revisit that goal down the road.
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